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Uzbekistan's "golden crossover" means listed equity dividend yields are now more attractive than bank term deposit rates.
 

 

AFC Uzbekistan Fund October 2020 Update

 

Dear Investors and Friends,

October saw continued buying interest from local and foreign investors alike amid a strong start to the 3rd quarter earnings season with the fund’s largest holding, Qizilqum Cement, reporting outstanding results. The fund NAV reached a new all-time high during October, increasing to an estimated USD 1,176.00 (+6.5%), according to internal calculations. 

  AFC Uzbekistan Fund valuations as of 31st October 2020:

 Estimated weighted harmonic average trailing P/E (only companies with profit):

3.16x
 Estimated weighted harmonic average P/B: 0.76x
 Estimated weighted portfolio dividend yield: 11.64%

 

Qizilqum Cement’s 3rd quarter 2020 net profit soars +224%

Third quarter earnings season kicked off in late October with the AFC Uzbekistan Fund’s largest holding, Qizilqum Cement (TSE: QZSM), at 31% of the fund, reporting nothing short of a monster quarter as earnings surged year on year by 224%, while book value per share rose 25%. We have consistently beaten the drum that Uzbekistan’s early stage of development should lead to several years of strong cement demand and this has indeed been the case, leading QZSM and other listed cement companies, which we also own, to outperform. During October, QZSM's share price rose 32%% as sellers withdrew their offers and new buyers clamoured for shares. We expect this robust share price appreciation to moderate for a while as no security moves up in a straight line. Though, clearly the new equilibrium for where sellers and buyers will meet will be higher than in prior months, and the trend in the share price remains decidedly higher. On the back of such strong third quarter earnings, even though the share price rallied strongly, the company still offers extremely deep value, ending October with a P/E of 2.04, P/B of 0.60, dividend yield of 18.04% and trading at an enterprise value per ton of installed capacity of USD 29.48. As a reminder from previous fund updates, new cement plants in the country under construction are bringing on new capacity at up to USD 120 per ton, 307% above QZSM’s current valuation per ton. Thus, we continue to view the share price of Qizilqum Cement as considerably undervalued.

Qizilqum Cement Share Price 

2020 10 QZSMpricechart

(Source: Republican Stock Exchange of Toshkent)

 

Cement demand remains resilient with the country powering past COVID-19, accepting it as something to live with as life has returned to normal in the country. International air connectivity has resumed with tourists welcomed, schools now have children attending class in person and restaurants are crowded and operating normally, while construction and infrastructure projects appear to be picking up speed. The seeming acceleration in construction activity could be related to falling mortgage rates (a byproduct of what we discussed in the September 2020 fund update with falling inflation leading to the Central Bank of Uzbekistan cutting its policy rate, enabling a decrease in borrowing costs). In 2020 alone, mortgage rates have fallen from a range of 26%-32% to 18%-22%, while the term of mortgages now reaches up to 20 years for a state-subsidized mortgage program and 15 years for market-based loans.

An example of the robust demand for cement and real estate can best be provided by my first trip to Uzbekistan in 2018, when I drove past a stretch of road (located 5 kilometers or a 10-minute drive from the city centre) heading to a meeting for a logistics company in the oil and gas industry, a company which is currently part of the fund’s portfolio. The road was bordered by deserted land and walled off land plots, located next to the old Aeroflot factory (an Aeroflot subsidiary used to build cargo planes in Tashkent). The area has since been transformed. Driving through the area last week there are now thousands of new economic apartments, modern supermarkets, shopping malls, office buildings and an extension of the Tashkent metro system. A new Wyndham Hotel is also planned for the area and a hospital funded by investors from the Middle East is already open.

Demand for housing in Uzbekistan is growing rapidly and unlike in various Southeast Asian countries, such as Thailand, Malaysia and Cambodia, Tashkent in particular has a sizable housing deficit, in the tens of thousands of units and growing annually. This means the housing stock coming online will be absorbed and beget further demand, creating a reflexive positive feedback loop of more job creation, more migration to the city and more demand for housing. The cement industry as a whole, and QZSM specifically, is well positioned to supply the years of future demand the country has ahead of itself.

A furniture showroom on the left and the Wyndham Hotel land plot on the right 

2020 10 OctPic1

(Source: AFC Research)

 

Apartments, offices, a car wash and shopping mall under construction in the vicinity 

2020 10 OctPic2

(Source: AFC Research)

 

Fund Transactions

During October 2020, the fund purchased a large block of Tashkent Vino Kombinati (TSE: TKVK) the largest consumer goods company in Uzbekistan and a leading producer of vodka, wine, beer, soft drinks, dried fruits and freeze-dried vegetables. We had been negotiating with the seller of the block for several months in order to secure an attractive price and ended up achieving a sizable discount from the initial asking price. With consumer spending at an early stage, we are excited to have acquired the block as TKVK now represents 9.2% of the fund.

Typically, when a country’s GDP per capita approaches USD 2,000, consumption begins to grow aggressively due to the compounding effects of wealth creation and rising incomes/salaries. Uzbekistan’s 2019 GDP per capita was USD 1,588, meaning it is still in the early innings (to use a baseball reference) of its secular consumption boom and we believe TKVK is the most leveraged listed equity through which to gain exposure to this theme.

For further viewing here are some interesting, relevant news links related to Uzbekistan: 

Uzbekistan’s Zaamin to be 4-season touristic hotspot

Uzbekistan unveils extensive privatization programme

Subscriptions

The next cutoff date for new subscriptions will be 24th November 2020. If you would like any assistance with the subscription process please get in touch with us at This email address is being protected from spambots. You need JavaScript enabled to view it.

Best regards,

Scott Osheroff

CIO AFC Uzbekistan Fund

 

2020 10 OctNAVChart